Alibaba’s Next Challenge: Making Money from Mobile Traffic

As Alibaba Group Holding gears up for what could be one of the largest initial public offerings in U.S. history, the Chinese company is also grappling with another big task of redesigning its e-commerce business for the mobile Internet era.

“Buyers, sellers and other participants are increasingly using mobile devices in China for a wide range of purposes, including for e-commerce,” Alibaba said in the filing. “If we fail to successfully adapt to these changes, our competitiveness and market position may suffer.”

The filing contained some upbeat numbers showing that more shoppers are coming to Alibaba’s services through smartphones and tablets. During the fourth quarter of last year, mobile transactions accounted for about 20% of all the transactions on Alibaba’s Chinese shopping sites, up nearly threefold from 7.4% a year earlier. In December, Alibaba had 136 million monthly active users on mobile phones for its e-commerce services.

Still, Alibaba warned that growing transactions through smartphones may not contribute as much to its short-term earnings growth, saying that its current priority is not to maximize its revenue from mobile services. Instead, Alibaba said that it is focusing on generating more user activity and transactions, while testing out various methods to make its mobile offerings more profitable. Taobao, Alibaba’s largest shopping site, doesn’t charge transaction fees, so an increase in transactions doesn’t automatically translate to more revenue for Alibaba.

“The increasing use of mobile devices to access our marketplaces requires us to develop new monetization methods for mobile interfaces,” Alibaba said in the filing.

Alibaba dominates China’s fast-growing e-commerce market. Last year, the company had 231 million active buyers, and its three retail sites in China – Taobao, Tmall and Juhuasuan — handled a total of $248 billion in transactions – more than twice as much as Amazon.com Inc.’s total transactions, which stood at $100 billion according to Forrester Research. Taobao and Tmall, its two main shopping sites, together account for roughly 80% of China’s online shopping market, according to Hong Kong-based brokerage CLSA.

While the potential market for mobile e-commerce is huge in China, Alibaba is locked in fierce competition with rival Chinese Internet firms such as Tencent Holdings over the country’s 500 million smartphone users. Tencent, which operates the popular WeChat smartphone chat application, is trying to offer more e-commerce services to the messaging app’s 355 million monthly active users.

Other than promoting its Mobile Taobao smartphone application through temporary campaigns such as mobile-only discounts, Alibaba has also announced a series of acquisitions and alliances with other Chinese companies that could help strengthen its technologies and services for mobile users.

Last month, Alibaba reached an agreement to turn AutoNavi Holdings into a wholly owned unit, after taking a minority stake in the mobile map maker last year. Also last month, Alibaba raised its stake in Sina’s Twitter-like Weibo microblog business to 30% from 18%, in connection with Weibo’s IPO. Alibaba also said in the IPO filing that it now holds a 66% stake in mobile browser developer UCWeb after its most recent round of investment last month. In March, Alibaba said it took a minority stake in TangoMe, a Silicon Valley startup that runs the Tango mobile video call and messaging app.